The government's insistence, in its dispute with Lavabit, that cloud service providers hand over their encryption keys when asked, has refocused attention on the issue of key ownership and management in the cloud.

Security experts agree that the best way for companies to ensure that their data is safe from snooping eyes in the cloud is to encrypt all their data and to maintain total ownership of the encryption keys. However, pulling off that feat is not always easy, practical or cheap.

Lavabit, a provider of secure hosted email services, shut down operations in August citing concerns that the FBI was coercing it into divulging personal information on its customers.

Founder Ladar Levison claimed at the time that he would rather shut down the company than be part of what he described as crimes against the American people. His actions were prompted by government demands for his company's private Secure Sockets Layer (SSL) keys for decrypting email communications believed to belong to former NSA contract worker-turned document leaker Edward Snowden.

Levison maintained that the keys would allow the government to unlock all encrypted communications belonging to Lavabit's users. He claimed the government's request was similar to someone asking for the master key to open all the rooms in a hotel, when all that was needed was access to a single room.

After initially digging in his heels and getting slapped with a $10,000 fine by a federal court, Levison finally hand-delivered a disk containing the keys to the FBI in August.

The U.S. Department of Justice accused Levison of compromising its investigation by shutting down the company and going public with his complaints. In a motion filed in the U.S. Court of Appeals for the Fourth Circuit this week, the DOJ maintained that Levison did not have the right to thwart the government's legitimate surveillance activities by shutting down the service altogether.

The DOJ angrily dismissed Levison's "parade of hypotheticals" regarding the actions the government could take with the encryption keys and likened his actions to that of a business locking its front gate to thwart execution of a search warrant.

The situation shows why companies that want to protect their data in the cloud need to encrypt everything and maintain full control of the encryption keys.

"This disclosure issue at Lavabit is one very good example of an organization's inability to maintain ownership and control of data in traditional cloud computing environments," said Elad Yoran, CEO of Vaultive, a vendor of cloud encryption technologies. "If a third party can turn our data over without our knowledge or authorization, do we really own or control our data in the cloud?" he said.

If a company maintains its own encryption keys, the government will need to make a legal request for the keys with the company and not the cloud provider, he said. Otherwise, all they would get from the cloud provider would be "encrypted useless gibberish," he said. "This puts the power of ownership back into the hands of businesses."

Richard Moulds, vice president of product strategy at Thales E-security said reports on the NSA's surveillance activities have heightened concerns over encryption key ownership in the cloud. "People are now beginning to ask 'why should I trust the cloud provider to look after the encryption keys?' " he said.

In theory, encrypting everything in the cloud is a great way to protect data from prying eyes, he said. [But] "key management is the Achilles heel of all cryptographic systems," Moulds said. "When you think about doing encryption in the cloud, who is going to own the keys?"

The problem with persistent encryption in the cloud is finding a way to make sure that all parties that require access to the encrypted data have the keys for decrypting it as needed, said John Pescatore, director of emerging security trends at SANS Institute.

"Encrypting data is easy, making sure the intended recipients, and only the intended recipients, can decrypt it" is challenging, he said.

Companies need to either find a way to make the decryption keys available as required or entrust a third party to distribute the keys in a secure fashion. "The former is expensive and hard to scale, the latter doesn't exist," Pescatore noted.

"For persistent encryption to work there has to be a trusted third party. But if you worry about government surveillance, you can't trust any third parties," which means being prepared to deal with a costly and complex in-house effort, he said.

Pravin Kothari, CEO of CipherCloud, compared most cloud encryption approaches to locking a car and leaving the key right next to the parked car. For companies to truly exercise control over their cloud data, some fundamentally new approaches are needed, he said.

CipherCloud for instance, offers a gateway technology that lets companies encrypt data while it is in transit to the cloud and while it is stored there. The gateway allows enterprises to store their encryption keys locally, while allowing users to interact with the encrypted data in the cloud with none of the usual key distribution issues.

There's also the question of whether the effort is truly necessary. Reports of the NSA's surveillance activities spurred widespread privacy concerns, but there's little to show that corporate data is at any risk.

"One of the best ways to protect data is to hold the keys to your encrypted data," said Lawrence Pingree, an analyst with research firm Gartner. But the whole NSA spying issue is overblown, at least in terms of its impact on corporate data in the cloud, he said. So far, there has been no evidence that has been publicly disclosed at least showing that the government has misused the data it has gathered or to which it has access.

"The focus on nation-state actors is overblown hype since the majority of data that is misused is from other threat actors such as organized crime, fraudsters and industrial espionage," Pingree said.